Momentum continues to build in the St. Louis commercial real estate investment market across all major product sectors. As private and institutional investors search for higher yields, they are drawn to secondary markets like St. Louis. Investors are seeing a yield premium of 100 to 150 basis points as measured by the initial cap rate.
Office Market Grows Hotter
The suburban office sector has generated the most momentum, building on a strong 2013. Suburban office investment sales activity could exceed $450 million in 2014, which would be a 90 percent increase over 2013. The largest office deal is the sale of Cityplace, an 884,000-square-foot Class A office complex in Creve Coeur that is under contract and expected to close for approximately $141 million. New Boston Fund and the Koman Group are the sellers. The buyer is undisclosed.
While the search for higher yields is certainly a factor driving increased suburban office investment activity, another big part of the story is the continued occupancy growth supported by job gains. The St. Louis unemployment rate, which in May 2014 stood at 6.96 percent, is rapidly approaching the pre-recession level of 5.7 percent set in November 2007. Growth in industries such as technology, life sciences and financial services has contributed to the improving job market.
Office market fundamentals have improved dramatically. The office market absorbed 850,000 square feet of space in 2013 and is projected to absorb about 500,000 square feet in 2014. Class A vacancy in the core suburban markets has fallen to 7 percent, its lowest level in 10 years. Meanwhile, asking rents in the core suburban markets have risen 3 to 5 percent during the past year, reports Cassidy Turley. Combine those trends with a negligible amount of net new construction completed over the same time period and a lack of large blocks of space, and the end result is a hot office market.
Bioscience and technology companies are at the forefront of office growth. Cortex Innovation Community’s 200-acre innovation hub and technology district, located in Midtown with I-64 to the south and Forest Park Avenue to the north, has generated more than $500 million of office and lab development.
Bulk Warehouse In Demand
E-commerce continues to play a larger role in the growth of the industrial bulk market, both nationally and in St. Louis. As a result, modern bulk buildings are in high demand. Despite solid industrial market fundamentals and strong investor demand, industrial investment activity could dip as much as 50 percent this year. That’s because 2013 was an exceptional year with several large property sales and total deal volume above $325 million.
Robust Apartment Market
The multifamily sector remains strong as housing starts are still tepid and many consumers continue to find it difficult to obtain a home loan. A shift in attitude by Millennials and Baby Boomers away from home ownership has created an entire class of renters by choice. Combined with solid job growth, these factors have created a tight apartment market marked by occupancies in excess of 95 percent and rising effective rental rates, which have averaged $704 per month per unit during the last five years. Effective rents have increased by 2.4 percent during the last year, reports Reis.
As a result, investors remain interested in acquiring high-quality multifamily properties in St. Louis. Although completed deals year-to-date are currently well below 2013 levels, it is projected that multifamily sales volume in 2014 will exceed the $208 million in deals completed in 2013 by 25 to 50 percent, reports Cassidy Turley.
Ikea Expands Into Missouri
On the retail front, there is tremendous investor demand for urban retail, grocery-anchored shopping centers and power centers. Investors are intrigued by centers anchored by Whole Foods Market as well.
The first Ikea store in Missouri is expected to have a widespread impact. Construction on the 380,000-square-foot store, located on 21 acres just east of the Cortex Innovation Community, began in June. When it opens in the fall of 2015, the Ikea store will create an estimated 300 permanent jobs. The project will also generate about 500 temporary construction jobs.
Retail investment volume is expected to be flat or slightly down from the level of volume in 2013, due mostly to a lack of product available for sale.
Income Growth Advantage
Over the next five years, income growth in St. Louis is expected to exceed that of the Midwest as a whole. According to Esri, which develops geographic information systems, the median household income in St. Louis will rise by 17.3 percent over the next five years. Across the Midwest, the increase is expected to be 14.5 percent.
These strong wage gains are expected to lift housing demand and accelerate the economy’s recovery. The greatest employment growth will come from the tech, life sciences and financial services industries. Look for this positive activity to continue spurring investors’ interest in all four product types in St. Louis as they seek better yields than found in primary markets.
— Michael Hanrahan and Paul Hilton, senior managing directors, Cassidy Turley.This article originally appeared in the August 2014 issue of Heartland Real Estate Business.